Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Tuesday, August 18, 2009

WHY CAN’T WE ALL JUST LEARN TO GET ALONG?

What is it with some people? Just because someone respectfully disagrees with you on a subject does not make them a fool, or stupid, or uninformed.

It seems I have, unintentionally, acquired a new enemy in the blogosphere because I have disagreed with the advice they have offered in a public blog post.

I agree with your post’s title – “There’s no shortage of bad advice out there” – however we disagree on who is actually providing the bad advice.

First of all, sorry for not being perfectly “PC”. This is a legitimate complaint. I do try to use “he/she” etc instead of he in my posts.

Secondly I take exception to being compared to “the tax pro who totally misunderstands indie life” simply because I disagree with you on one issue. I have been preparing 1040s for “indies” since 1972, a bit longer than you, and have been an “indie” myself most of the past 38 years.

Now on to your comments on my comments (the highlights are hers) -

You say - “Well, he says, “loan” money to the business account from your personal account and then return it later. If you have attended my seminars or read my book you know: That leaves a very wiggly audit trail for the IRS to follow.”

It would seem to me that using one’s personal checking account for both business and personal expenses is more wiggly an audit trail for an IRS auditor to deal with.

You then quote your original post - “The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.”

What a silly example. What fool would give a gas station attendant his/her check to pay for a gas purchase? Do you know of any gas station that would accept a check? If the business person uses the Standard Mileage Allowance he/she would just reimburse himself/herself from the business checking account for the appropriate business mileage. If the actual expense method were chosen the business portion of total auto expenses would be reimbursed.

One would expect you to use the usual courtesy of “Mr” in front of Flach when discussing me. You mention that I “took respectful disagreement” to your post. One would expect you to provide the same respect.

Rather than merely “pooh-poohing” me as one who does not understand “indies” just because we disagree I would prefer a serious discussion on the issue. You could, perhaps, explain why if you do not agree with my statement that an indie should “do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a ‘hobby.’”

Regarding your other opponent - I am not a fan of Mr Pappas, and have myself felt his wrath, similar to your wrath, when I dared to disagree with him. I would agree with your reference to him as “Attila the Tax Lawyer”. It appears that he does not know how to express “respectful disagreement”.

To be fair I do not believe you advised corporate officers to pay business expenses with a personal check. I took your post to be concerned with self-employed individuals, LLCs or not, who file a Schedule C.

I totally disagree with his statement – “If you have a serious business, it’s unwise to operate as a sole proprietorship and probably malpractice for a lawyer not to point that out to his clients.” Lawyers in general like to tout corporations because of the additional legal fees involved in forming and maintaining a corporation.

Let me know when you want to conduct a serious and respectful discussion on this topic.

TWTP

As of the time of this posting (4:00 PM EST) the above comment had not been published on Ms Walker’s blog, and therefore no response was provided. I will let you know if my comment ever does appear and what, if anything, Ms Walker has to say in rebuttal.

I would appreciate hearing from other tax professionals out there on the issue of using a business checking account. Who is right – Ms Walker or I?

FYI, Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG has already weighed in on my side in his post “If You Have a Home Business, Should You Have a Business-Only Checking Account?” Joe says – “Mr. Flach gets it right. You will save yourself a lot of time at tax time, and a lot of grief in an IRS exam, if personal is personal, business is business, and that's that. Run your business like a business.”

8 comments:

Robert, just in case she doesn't post my comment.I must say I am disappointed with your dismissal of tax professionals who have chosen to disagree with you.As to the business checking account issue, I always have and will continue to recommend separate business and personal accounts. Why? Based on 21 years of tax return preparation (and 2 having micro businesses) my experience has taught me...While good documentation of business expenses from a personal account may help in an audit, I would never want to convince an IRS agent that flowers for my mom were a business expense even if they were. It's too easy to spend the business money for personal bills and not have to money to take care of their business bills. Or the reverse. If you use only one account, you still have to keep track of how much you can spend for business and personal. Hobby vs Business classifications are easier if the owner is acting like it is a business and takes on the responsibility of a business account.It's really cheaper. My business account is free most of the time and even if it wasn't a few bucks a month is much cheaper than paying the tax professional to clean up someone's personal/business account to do taxes. I can't think of a client with a merged account who didn't need me to spend extra time (and charge more) to audit their account for legitimate expenses. If you want to buy the kids' school supplies and copy paper and toner for the business together from one account. Be prepared to pay me to separate them and pro-rate the tax. Much cheaper to separate them and pay for them separately from different accounts.I am sure I can come up with other reasons but this should get my point across.TrishPS- I hope I left you some spelling and grammar mistakes to belittle me with.I also will have a short post on Taxing Times but it is not scheduled until after 5pm CDT.

Whether or not a taxpayer has a separate banking account for a business and/or comingles funds between the business and personal accounts is an issue that has come before the US Tax Court. The court always holds against the tax payer any comingling of funds and/or failure to maintain a separate account. A taxpayer must then prevail on other facts and circumstances to win their case that they are conducting a business. At a minimum, anyone advising a taxpayer to not maintain a separate bank account should also advise them that they stand a greater risk in a tax audit and before the US Tax Court if they fail to maintain the account.

“Petitioner commingled the financial affairs of the horsebreeding activity with his personal finances. He paid all theexpenses of the horse breeding activity from his personalaccount, and the horse breeding activity maintained no financialaccounts of its own. This commingling of funds is an indication that the activity is a hobby rather than a business for profit.”

“The sole issue for decision is whether petitioner operated her horse breeding activity for profit in 1988, 1989, and 1990.We hold that she did not.”

“d. Commingling of Funds

Commingling of funds suggests that the activity is a hobby rather than a business for profit."

"Petitioner paid the expenses of the horse breeding activity from petitioners' personal account. She had no separate bank accounts for the horse breeding activity.”

“Petitioners used a credit card for her horse activity. However, she did not say that she paid all of the horse activity expenses with the credit card, and she paid the credit card bills from petitioners' personal checking account. She did not segregate income from her horse activity.”

Petitioner did not carry on her gambling activity in abusinesslike manner. Petitioner did not have a written businessplan for her gambling activity. Petitioner did not have aseparate bank account for her gambling activity, and occasionally, petitioner commingled personal and gambling funds.”

The above is just as small sample of the Tax Court cases dealing with the subject. A search of Tax Court opinions with the keyword “businesslike” returns more then 50 results.

Some simple rules (not directed at you or anyone in particular) from a discussion list far far away:

- Don't attack *people*. Attack a subject, a couch, or your car, but people are off limits;

- By "don't attack people", we mean don't name names; don't make "certain people" comments which are sufficiently pointed that we all know who you're talking about; Don't be mean;

- Address your comments to the issues and opinions with which you disagree, rather than the people with whom you are disagreeing;

- Remember that everyone in here is effectively a Fellow in the College of Tax Practice. Treat *everyone* in here with respect. Even if - *especially if* - you hate their guts, or their employers guts.

In case June doesn't post my comment...I might have been a tad harsh...

OMG -I can't believe what I am reading. Is this how tax bloggers behave?

First, let me just say that the idea of advising a client that they don't "need" a business checking account is ludicrous (in my opinion). Frankly, some clients just don't need to know about the things they don't need to do. LOL. Besides, not all the things we advice are clients are required by "code" tax or otherwise. For example, I advise my self-employed clients to have health insurance. It's not required, but heck it’s a good idea.

However, that’s not why I felt the need to join this discussion. Frankly, your ad hominem attach on a blogger for his grammar and spelling errors, is the epitome of "chick think." It reminds me of a frustrated wife who lacks the skills to produce a valid argument so then attacks her husband's manhood, a topic completely unrelated to the discussion.

Maybe this was your intention - or maybe not.

However, your comments completely take from the substance of the argument and frankly invalidate your credibility since the ad hominem attack is generally used when one is unable to find fault with the original argument.

I admit, I was offended and put off by your comments. You might want to rethink that for next time.

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